Comments on: Dr. Jain Answers your S&OP and Forecasting Questions — July 2016

By: Chaman Jain

Chaman Jain — Sat, 23 Jul 2016 16:09:05 +0000

Daniel,

To understand my viewpoint on centralization, it is important to recognize what is the best way to prepare forecasts. To me, it is a two-step process. One, prepare baseline forecasts, which are statistical forecasts, and two, through a consensus process, overlay judgment over baseline numbers, to account for information that cannot be quantified and/or for information that was not available at the time baseline forecasts were generated. Although the Marketing plan affects forecasts, and forecasts affect the marketing plan, but, ultimately, for practical purposes, we have to come up with forecasts that are based on the final Marketing plan. The centralized team has to obtain input from Sales and Marketing before generating statistical forecasts, so the impact of any change in plan about price, advertisement and number of products to be launched or delisted is in the statistical forecasts. So, we don’t need to convert forecasts into a marketing plan. Believe me, even statistical forecasts can be biased. Since the centralized team will be as impartial as possible, forecasts will be pretty much unbiased. As far accountability goes, if they are finalized through a consensus process, the consensus team should be accountable. Sales, as a member of the consensus team, are committed to those numbers. You are right that S&OP should be responsible for Family level forecasts, not SKU level forecasts.

You raised a very interesting point about new products. They should certainly be reviewed as a part of S&OP process. But I will go one step further to say that we need a separate team, within S&OP, to review new products, and meet more often than monthly, maybe weekly. The reason why I am saying this is now a large percent of sales (23%, based on the recent IBF survey) come from new products, and thus require special attention. Plus, their life cycle is getting shorter and shorter. There are number of new products that present problems but are fixable. The sooner we take care of them, the better are chances of their success. Some new products offer new opportunities, as well. Again, the sooner we recognize and tap into, the better it would be. (Whatever the decision is made by this team should be communicated to the S&OP team so that it can incorporate in its plan.) Take the example of New Coke, which was launched in 1985, it took 77 days to bring back the old Coke. Looks like Pepsi did not learn a lesson from it. In August 2015, in an effort to reverse the declining sales of Diet Pepsi, they replaced their sweetener ingredient aspartame with sucralose. Of course, this did not help sales and turned off customers. Despite, all the early warnings, it decided to bring back the old Diet Pepsi about one year later. If there were a separate New Products planning team that monitored performance closely, it would have acted much earlier.

By: Chaman Jain

Chaman Jain — Sat, 23 Jul 2016 16:08:14 +0000

Earl, you are right, it is not the function of the S&OP team to go over forecasting needs of different functions. Forecasting is one of the components or steps to be followed, without which the S&OP process won’t function. To have the best forecasts, it needs to do two things. One, prepare statistical forecasts, and then Two, through a consensus process, overlay judgment over statistical forecasts to account for information which cannot be quantified and for information that was not available at that time. What I am saying is that statistical forecasts should be centralized, not the S&OP process.

By: Daniel Druwe Araujo

Daniel Druwe Araujo — Thu, 07 Jul 2016 17:12:49 +0000

The centralization answer may be appropriate for the forecasting per se. Nevertheless, forecasts need to be converted into sales plans. The difference is that forecasts try to foresee what the market will demand, under certain assumptions. Sales plans state what the company commits to sell. Failure in recognizing the difference is at the root of many of the problems. Sales plans can be centrally coordinated but the accountability for the sales plans must be strongly put on the people who will execute the plans. If these people are decentralized in different business lines or market segments, the accountability will have to be also decentralized, no matter how centrally the process is coordinated.
Sales plans may become different than initial forecasts, not only because of short supply but also because of strategic or tactical decisions, e.g., to change prices, advertising and promotions.
Once forecasts are adjusted to become sales plans, it makes no sense to measure actuals against initial forecasts, but to sales plans.
Some try to catch that by using the term “consensus forecasts”. The problem is that “forecast” implies much less determination to make happen than “sales plans”.
It is important to emphasize that the accuracy of the forecasts (better yet sales plans) is only half dependent upon the quality of the forecasting process. The other half depends on the quality of the execution process. Therefore, a central forecasting function cannot be accountable for more than half the way and cannot centrally resolve the deviations.
This is another major cause of frustration and failure in “improving forecasts”, as the root causes are many times predominantly in the execution arena.

S&OP is, in many companies, confused with the lower level, SKU planning. S&OP should be focused on medium term, family level planning. At this level, it should make the final decision on the sales plans. Forecasts should be an input from the forecasting / marketing and sales functions, treated through the Demand Review step of S&OP.
This level of forecasts/sales plans will determine the family level, medium term production plans. The S&OP should not be concerned with SKU level, short term forecasts/sales plans, as long as they reconcile, when aggregate, to the family level plans.
There should be a master planning or equivalent function and processes, below the S&OP, to support that.

New products, ‘regular’ or ‘special’, simple or complicated, should be reviewed in the S&OP process. The Oliver Wight model is, in this sense, much more appropriate than Wallace’s, defining as step 1 the Product Review. The Demand Review is, in OW’s model, step 2, which makes sense: one can only determine the proposed sales plans after understanding what will happen with the product portfolio: additions, changes and discontinuations.
But the S&OP cannot be made into the process to manage the products or the product portfolio. The S&OP is only a monthly review, decision and aggregate planning process, taking inputs from the regular management processes, and returning the decisions and plans made to those same processes for detailing and execution.

Lots of confusions around the S&OP, unfortunately.

By: Earl Hendricks

Earl Hendricks — Thu, 07 Jul 2016 14:57:09 +0000

Dr. Jain,
As to the Centralized question. Is it not the function of the S&OP team to sort through the different needs of the silo functions, which would include the different forecast needs. Thus, is not S&OP functioning as a Centralized Forecasting function with DE-centralized participants from throughout the company?